Laurence Tosi had a front seat for another banking crisis: He worked as a top banking executive and then private equity executive as the financial crisis swept up Wall Street.
Tosi is someone I turn to when I want to get a sophisticated investor’s account of what’s really going on in Silicon Valley.
His resume straddles Wall Street and Silicon Valley. He worked as the chief operating officer at Merrill Lynch, as the chief financial officer at Blackstone, and as the chief financial officer at Airbnb. Today, Tosi runs an $8 billion investment firm called WestCap that invests in startups and venture capital funds.
As Silicon Valley Bank was unraveling, Tosi guided his portfolio companies on how to move their money out of the bank. Then, over the weekend, after Silicon Valley Bank failed, he talked to top banking executives, Senators, and members of Congress, including Representative Ro Khanna.
Tosi, despite his generally optimistic outlook, offered a bleak take on what this year will look like for the startup industry. He predicted a “hard landing” and that 2023 will be even tougher than last year for startups.
“The worst is yet to come,” Tosi said. “They raised rates so fast, the shock to the body after so many years of such a dovish stance and zero rates, it’s going to take some time to work through the system.”
On the Newcomer podcast, we discussed the bank run and what led to Silicon Valley Banks failure.
Give it a listen.
Find the Podcast
Get full access to Newcomer at www.newcomer.co/subscribe
00:00:01
Hey, it's Eric newcomer host of newcomer, the Silicon Valley
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just blew up or at least Silicon Valley Bank just blew up.
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So I called in an audible rescheduled the podcast guests
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invited on Laurens. Tosi the former CFO of
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Blackstone, the former CFO of Airbnb, former Chief Operating
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Officer of Merrill Lynch. This is a real behind-the-scenes
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player. Somewhat, I go to to gut-check
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ideas and to figure out what's really happening.
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Happening in Silicon Valley, as will tell you on this podcast,
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he spent the weekend talking to members of Congress and Bank
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Executives to try and figure out what's going on and what's been
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going on and why Silicon Valley Bank unravels.
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What's this mean for Silicon Valley?
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Going forward, certainly I think a.com style bust looks much more
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plausible. Now that we've got our big Bank
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explosion. So stick around.
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Listen, I think it's a fantastic episode.
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Thanks. Welcome to newcomer.
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Thanks for coming on the show. Sure.
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Thanks for asking me. It is been the craziest period
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in Tech. I don't know, covid may be
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Rivals it or where would you score this in terms of wild
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periods for private technology companies?
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It is probably been the most volatile five-year period.
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I think we've ever seen through, including my, before the
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pandemic, the pandemic itself, the recovery, the hype cycle, if
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you will, and the public markets than the dramatic crash.
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And now, of course, The infrastructure crumbling
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underneath the industry. It's been remarkable, right?
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These last few days, in particular, I mean, some of, the
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fastest movie I've ever seen, I feel like, I think that's true.
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I mean, I was Chief Operating Officer at Mel in 2007, and then
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I was one of the senior partners and CFO Blackstone 2008.
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And to be honest, Eric it felt like I was right back there in
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the coming week. Is felt like, you know, rate
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hikes have a deteriorating effect and I think the FED
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really was late The red State too low for too long, we over
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stimulated. The economy that led to really
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the type probably saw, then you have a valuation crash first
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after the evaluation crash, usually then have a period of
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stagnation and eventually declining growth, which you're
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seeing now you're seeing lots of downward revisions and what
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really happened here was that the rates Rose so fast.
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It actually did an enormous amount of damage to the banking
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infrastructure. So before you even get the
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Silicon Valley Bank, there's 600 billion dollars of unrealized
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losses on back. Balance sheets across the u.s.
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So this is one of those latent effects of a fast rate rise in
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the aggression fed broke the system, right?
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Okay. So your financial experience
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plus, you know, CFO of Airbnb. Now, sort of a major investor
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seen it both on the fun side and directly someone who helps me
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understand things behind the scenes, wanted to bring you on
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to really translate this for everybody about what's
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happening. This has been such a confusing
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period that I think we're going to try and keep it as
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chronological. Possible, just so people can
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follow it. So sorry at the beginning.
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I think he laid it out. The biggest picture event that's
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happened. Is this sort of interest rate
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hike, that sort of set the stakes here, right?
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Is that the starting gun if you have fly?
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I think, I think it actually starts with this.
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The economy in December of 2019 was very strong as strong as
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we've seen in years. And the Fed was poised then to
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begin. Raising rates, the pandemic hit
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six weeks later and that gave people pause about three months
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later, we To seeing the stimulus going, you need economy,
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obviously was an election cycle, had a lot to do with it as well
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and in a lot of ways, you over stimulated the economy but rates
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remain low, that began when I would call the hype cycle into
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20 and coming out of the pandemic in the late 20s and
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early 21. You saw multiples for technology
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companies, expand the levels that we've never seen before.
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You know, tech companies that would trade at 8 to 10 times
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revenues for trading in 25 30 and even more both in the public
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and private markets and late twenty you saw a really good
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idea. Market moving at 21 and then
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inverted when the public markets, Tech markets went down
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then the private markets followed shortly after about six
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months. So this is really been a cycle
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are that's been in place for a couple years.
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So what happened? Then offense started raising
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rates later than they probably should have been too low for too
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long, which created a lot of distortions and then they super
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aggressively went at the rate rise basically, from 0, all the
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way, to four point seven, five and just over a year and that
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always has a latent. Affect the GDP of the country.
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Usually feels more pain in the second year after rate Rises
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that in the first. And I think that's what we're
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seeing now, all right? So one character you know the
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fed and interest rates but probably the main character that
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everybody is following here is Silicon Valley Bank.
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What are they doing? Like 2020 2021?
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Just give us a little bit of like where Silicon Valley Bank
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sits in. I guess the boom time ecosystem
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of Silicon Valley in 2021 social justice.
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Their size force all incredibly unique business model around for
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40 years. Had really been the go-to key
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bag for the Venture Community. Not just friendship, adventure
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and growth and really, actually, not just the company's but a lot
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of the firm's themselves. So you could say, it was a
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critical part of the ecosystem and much like the hype cycle of
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money pouring into technology at the end of the pandemic and the
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markets hot. And like there's a lot of IPOs
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Silicon Valley Bank start rocking.
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They went from about 60 billion dollars in assets.
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In 2022 106 billion in 2021 to 211 billion on December 31st of
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last year, which is a remarkable amount of growth by any
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institution. And that's just driven by record
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fundraising levels record, exit levels and just a general
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technology economy exploding and then they were definitely the
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beneficiary that because they were the best position.
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I don't think any Bank comes close to me.
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Think about this sir. If you had said five years ago,
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that Silicon Valley Bank would be a 16th largest bank in.
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U.s. I don't think anybody would
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believe you because they would say well it's a little bit more
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Niche and it's right. Why didn't start on time.
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So the key piece of this is that startups are raising these
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enormous rounds. I mean, we saw a proliferation
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of hundred million dollar rounds.
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In 2021, they take that money and some of them are just
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putting that into Silicon Valley Bank, right?
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And then Silicon Valley Bank. I think we saw what Sequoia had
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like five billion in the bank somehow there.
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So we've got Venture firms that have a lot of money in Silicon
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Valley Bank to is. You know, on that are fertile.
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They did a great job. I mean they really serve the
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community really well, they were really great at relationships.
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Honestly everybody I've ever met from that bank from Silicon
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Valley Bank was really professional.
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They knew what they were doing and I think the community
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rewarded them for being there. There's a couple interesting
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things that are idiosyncratic about Silicon Valley Bank.
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Do one is a lot of the Venture debt that they lent bit about a
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75 billion dollar loan book. They don't do things like
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mortgages and what typical bags do, but there's a lot of venture
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debt that's a Highly unique asset, / liability I guess in it
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when they did the 75 billion to lending they quite often in
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their terms would say you have to keep 80% of your deposit to
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the bank. So it was kind of a circular
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reference in the sense that was creating a dependence of a lot
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of these small companies on the bank and the way they did
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business. But they serve the community
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well and they were rewarded by the row.
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The Venture debt I think all in, you know, made a big deal about
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the Venture debt and I so I am interested.
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How much you think that is at the core of this but it's a
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Assessment that many of the other Banks didn't want to do
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right? Or what sort of controversial or
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challenging about these Venture debt deals.
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So I'll give you examples. We've actually studied some of
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the term sheets that have come across some of our businesses
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and said, oh we've stayed away from Venture debt by and large
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and give you a bunch of reasons why.
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But I actually think Eric Venture death pretty close to
00:07:50
equity, but it's prices back then.
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So the typical package from like in spb would have eight to ten
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percent paid. In kind not cash interest, it
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would have Very, very broad collateral.
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Climates, exact exceptionally broad, I guess all assets of the
00:08:04
company they would typically ask for some warrant coverage about
00:08:08
one percent of the loan amount and they would also ask that 80%
00:08:12
of the deposits were made the bank.
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So it created a dependency, that's quite unusual.
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We recommend all of our portfolio companies.
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They have three or four Banks a mixture of regionals and the
00:08:21
large National Banks and they do that.
00:08:24
But when you think about, you just said some rounds are 50 to
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100 million. If you were to keep under the
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FDIC Limits erased, 50 million dollars.
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You would need 200 Banks to stay under the limits.
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Of course, that's not feasible. So I think a lot of people just
00:08:38
kept keeping their money to looking guy back after the race.
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It as their companies grew and the rounds got bigger.
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I think they just stayed with the relationship because I think
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they were well, served by the bank, and you're a key part of
00:08:50
Silicon Valley, Bank steelmaking was his relationship with like,
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venture capitalist, It was an LP in some VCS, it had the trust of
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VCS and so it felt like it could underwrite these debt deals
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better than other Banks. Because it also could sort of, I
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don't know. Go to the Venture firm and say,
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oh, you weren't straight with us or whatever.
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Is that your impression, you think it was that loose or like,
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how much is the relationship between the VC's in Silicon
00:09:17
Valley Bank sort of key here? So I think they had very good
00:09:20
relationships. I never saw them being loose.
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They would do their work, and they do their due diligence the
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companies. But the Howdy was they were
00:09:26
investing in technology companies that are highly
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competitive environments, a lot of them are losing money and
00:09:31
have extended period Runway before they'll make money.
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And I actually think in the end one of the failings wanted been
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they expected the Venture Capital Community or the growth
00:09:41
Community to backstop, right? Because you look at the client
00:09:44
Sarah. I mean, they own the company if
00:09:47
somebody default to one of their women their laws, I'll go even
00:09:49
further. Even before you draw an SV be
00:09:52
long, they have covenants against all of your assets, And
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so effectively, they were a wedge in front of even the
00:09:59
preferred Equity or common early.
00:10:01
And so, there are some chinoise, the kind of moral hazard for the
00:10:04
Venture capitalists, you're going to have to make sure that
00:10:07
Silicon Valley Banks made whole. Because if you don't your
00:10:10
equities wiped out right now, turned out you Vlad assumption.
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That's also Eric. If I had to guess, that's why
00:10:16
they couldn't auction the bag off here in the US because I
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don't think anyone else would take a 75 billion dollar
00:10:21
Adventure book. I don't know.
00:10:22
That's awful. If I billion ventured, but a lot
00:10:24
of it's been I don't think anybody else is capable of
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servicing it and you know what, that's a 10% her turning paper.
00:10:30
Maybe that's not mezzanine, or even Equity level returns.
00:10:34
So I'm not sure they were getting paid for the risks.
00:10:36
They were taking. All right, so we'll get into
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sort of whether anybody will buy this down the road, but 2021
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great year, for Silicon Valley Bank does a ton of deals.
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Lots of money raised 2022. I think we see more of these
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Venture debt deals, right? Because startups need them way.
00:10:55
Her hair, if they didn't want to deal with the valuation, right?
00:10:58
So a lot of video as valuations came down late. 22, right?
00:11:02
Right. Right startups.
00:11:03
Don't want to do. They wanted to have a way to
00:11:05
delay him. Yeah, Kick the Can trade, right?
00:11:09
We were warning companies early last year that that was very
00:11:13
dangerous to keep the candy much.
00:11:15
Rather forget a good company valuation changed, take your
00:11:18
medicine, raise the equity. It may be more diluted and get
00:11:21
back to work, trying this. You know, all I'm going to do
00:11:24
this Venture decks. The fact that we Blocking the
00:11:26
equity. It's like super preferred.
00:11:27
And so it actually creates a downdraft even further on
00:11:30
valuation. You may think you're preserving
00:11:32
your value, but you're definitely, you know, impacted
00:11:35
yourself to a downside because the liabilities are taking on.
00:11:39
All right. So then for Silicon Valley Bank,
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any Bank sees that there are some interest rate movement.
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But how do I ask or explain the the mortgage security issue
00:11:52
basically sort of Silicon Valley, Bank's own Style of
00:11:55
investing. And I think in particular touch
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on this is a bank. But in some ways, it's
00:12:00
investing, you know, like more of an investment firm or what
00:12:04
are the moves, they're making this sure if a lot of time
00:12:06
thinking about this because obviously had Treasury and risk
00:12:08
porting to be in Blackstone Merrill.
00:12:10
And actually went, I was later. I actually had a treasury fund
00:12:14
at Blackstone where I would actually managed to balance
00:12:16
sheets of our portfolio companies.
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I did the same thing at Airbnb. We carefully manage the balance
00:12:21
sheet. At one point, we were making
00:12:22
more than a hundred million dollars of ebitda just off of
00:12:25
her. There's the balance.
00:12:26
So the reality is treasure. You should never lose money.
00:12:28
You should never take directional baths and you should
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run a very balanced liquid book. The book should be liquid
00:12:34
according to what the demands of the business are and it should
00:12:36
be balanced according to rate, shocks or credit exposures.
00:12:40
So a typical treasury, this is what's really ironic are a
00:12:44
corporate treasury. Actually could not put money in
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Silicon Valley Bank because before this run, it was a BB
00:12:53
credit and typically, corporate SRI has to be an investment
00:12:56
grade. A credit a - credit or above.
00:12:59
She, they couldn't take large cap, corporate deposits.
00:13:02
Like, they couldn't take deposits from a black stone
00:13:03
portfolio. So here's what happened rates.
00:13:07
Went up so fast that at the same time, so, can I back was
00:13:11
aggregating so much assets? They had to put it somewhere and
00:13:14
so they made investments in long-term bonds that quickly
00:13:18
came under water. When rates went up so much.
00:13:20
So let's say they, I think they're yield on their 30-year
00:13:23
book was in around A half to three and a half percent and
00:13:27
because they will bring that one in and you were investing in
00:13:29
treasuries the same time, their deposit accounts.
00:13:32
They were paying their depositors about 4.6 percent.
00:13:36
Hmm, after it was, when rates are went from basically zero, to
00:13:41
four point seven five in such a short period of time, their
00:13:44
long-dated treasury book and their mortgage backed security
00:13:47
book was underwater because the rates were lower than you can
00:13:50
get with other Securities now, right?
00:13:53
To begin very layman terms, as I Stand it.
00:13:55
The idea was that if they held these bonds forever till they
00:14:01
could be exercised, they would be up but it would be smaller
00:14:04
than if you bought something else on the open market.
00:14:06
This is why the mark-to-market ish, right?
00:14:09
Because if you Market to Market, then you you'd sell it at a loss
00:14:14
because nobody wants it because they can get a better deal from
00:14:17
what's available today. We can agree.
00:14:19
Is that that's close. That's right, so we expect this.
00:14:22
We are so in a treasury book, there's two parts of There's
00:14:25
available for sale, which would be money market fund like that.
00:14:29
That's shorter term and that's mark-to-market then there's held
00:14:32
to maturity right or held for investment.
00:14:36
That means that you can hold that 30 year bond and you can
00:14:38
get your two and a half percent interest and you'll get paid out
00:14:40
before principal in the 30th year, the problem with Silicon
00:14:43
Valley Bank as I understand, it was once there was a demand for
00:14:47
withdrawals, they needed to go into they're held to maturity
00:14:51
book. Sell 21 billion dollars of
00:14:54
mortgage-backed securities. He's and treasuries at a 1.8
00:14:57
billion dollar loss, which you know, it's eight half percent.
00:15:00
It's not a huge loss but it's unusual to do that which means
00:15:03
that their company was under pressure because they had to dip
00:15:06
into what they would have held for a long time and realized
00:15:09
losses. You now do you think that held
00:15:11
to maturity distinction makes sense?
00:15:14
I mean part of the reason they want all these assets is if they
00:15:16
ever need to liquidate them. So they can pay their account
00:15:19
holders, they can do you have a view on whether the any is non
00:15:24
mark-to-market accounting? Make sense for a bank like this.
00:15:26
Well y'all comes out judgment call and make the judgment is
00:15:29
that he put it in your held to maturity book.
00:15:32
That should be a capital that you never have to access before
00:15:36
it goes to maturity. Number one.
00:15:37
Number two, thirty years was an awful long time for bank.
00:15:40
That's growing at that rate, right?
00:15:42
Because they being a fan but I pretty years awful lot and you
00:15:45
you're running the risk and it's very hard at that scale when
00:15:49
they have 211 billion in assets that scale hedging, it is really
00:15:53
almost impossible. So the way you had your teeth,
00:15:55
You just take shorter term, treasuries and you grind through
00:15:58
those and they did. And so they have this
00:15:59
longer-dated book. And also, everything is 50% of
00:16:02
their assets were these long dated treasuries and agencies.
00:16:05
That's a pretty aggressive mix for a bank.
00:16:08
Like this puts judgment calls me, we'll never know.
00:16:10
I wouldn't want to second-guess what they were doing, but it
00:16:13
appears what they had to do was sell 1.8 billion that wasps hit
00:16:17
their Equity at the time that he the sale, their market cap was
00:16:20
only 12 billion and that's a big lost, 15% lost the market cap,
00:16:24
and now I think Deposit withdrawals just started to
00:16:27
accelerate they were downgraded or they were put on watch by
00:16:30
Moody's on March 2nd March 3rd not also began to then quench
00:16:36
their credit and create the more of the withdrawals that you saw.
00:16:39
So, in November, 20, 22, I believe, Green Oaks it's been
00:16:44
reported, sent a letter to their portfolio, companies warning a
00:16:48
little bit about Silicon Valley Bank.
00:16:50
So now I just said as a data point that there were some
00:16:52
concerned then. And then I think in January, I
00:16:55
think Seeking Alpha, I think another sub stack started
00:16:59
publishing pieces, questioning Silicon Valley Bank or like
00:17:03
yeah, is that November January is when this sort of really
00:17:06
started to turn against the bank?
00:17:08
Or how are ya. A think about it this way?
00:17:10
I mean, the objective news, we know, is that least by late
00:17:15
February? They had to dip into their held
00:17:16
to maturity book to get with quiddity to make deposit.
00:17:19
So that point it must have been deteriorating for a while and I
00:17:22
give hats off to kneel Meadow and the Green Oaks post.
00:17:24
You'll agree Master. We've done a bunch of things
00:17:26
with him. He understand public markets,
00:17:28
and private markets, and I think he was right to warn the
00:17:31
companies to be careful that this could change.
00:17:34
Remember, it started as a BB back so it was starting from a
00:17:37
position that had. Let's call it a higher risk
00:17:40
profile in a typical Bank. You know JP Morgan's double-a.
00:17:44
First Republic's in a 1 or a minus mean, those are much
00:17:47
higher rated banks by a wide margin would.
00:17:49
Yes, I would say that in the end will probably find out that the
00:17:52
deterioration in deposits began as a crawl.
00:17:54
And Finished with I think they have been reported that they had
00:17:58
42 billion dollars or redemptions last Thursday.
00:18:01
I think that's Mark's job creation, and deposits.
00:18:04
At first isn't necessarily all driven by fear of Silicon Valley
00:18:09
Bank having problems, right? Part of the issue is an SUV
00:18:13
talks about this that, you know, companies have burning even
00:18:17
though they weren't raising as much money.
00:18:18
So suddenly they're just burning through their bank, accounts, an
00:18:21
SUV and suddenly Seb has less money and A really broad Point
00:18:26
as we be with sort of double exposed to interest rates going
00:18:30
up. The obvious one, was they bought
00:18:33
these investment vehicles that just had to low of interest rate
00:18:37
and it could have waited or found some other vehicle to
00:18:40
optimize for higher interest rate.
00:18:41
And then the second is obviously that the start of Industry which
00:18:45
SV B is overweight in is so exposed to high interest rates,
00:18:49
right? It's robbed a low interest rate,
00:18:51
environment and struggle to not high interest, rate environment
00:18:54
and so SUV. So, if anything should have been
00:18:56
hedging and preparing for a downturn, in a world where
00:18:59
interest rates went up, would you ask me?
00:19:01
I think, I took away, but it's almost like an echo effect.
00:19:04
Eric, as you point out, there were a bunch of factors their
00:19:06
client base was weakening on the corporate side, the firm's the
00:19:11
funds, which slowing down fundraising and funding new
00:19:14
companies valuations were going down because they're under
00:19:17
pressure interest rates. Their book was deteriorating
00:19:20
because they were mismatched on both maturity and liquidity and
00:19:24
the interest rate. Don't leave out.
00:19:25
One other thing too is that just wasn't that attracted when rates
00:19:28
you were able to get, just think about this just last week you
00:19:32
could get five point zero seven percent on a 2-year treasury.
00:19:37
So even if Silicon Valley Bank was giving people four and a
00:19:40
half, they were better options in the market, Eric.
00:19:42
So I would say that there was and that's what's happening a
00:19:44
lot of regional Banks. I mean people were moving money
00:19:47
to higher yielding opportunities with less risk, right?
00:19:51
The bank's thought their customers would be sticky.
00:19:53
Turns out they're going to chase the best.
00:19:55
Interest rate they can which makes us very competitive and it
00:19:58
was interesting. And you know, you're a leader in
00:20:00
this space, the Silicon Valley bag.
00:20:03
He's in the middle of an ecosystem, that's pretty close.
00:20:06
Meaning once the Run started, it's not like thousands of VCS
00:20:10
need to move for this thing to collapse pretty quickly.
00:20:12
It's right, we hundreds because there's scale players, you know,
00:20:15
80% of the acids from the top 30 firms.
00:20:18
And so I think it moved pretty quickly and rumors started going
00:20:23
around. I was getting texts and emails
00:20:24
and Of inbounds to our company's last week and that can usually
00:20:28
tell ya, when does The Run start in your mind?
00:20:31
Do you have a date or you? So the first time we started
00:20:35
seeing people approach our company's other investors
00:20:38
approach. Our company's versatile, we want
00:20:40
treasury centralized and we were way ahead.
00:20:42
So we didn't have any of this exposure.
00:20:44
That means, you can see all your companies sort of.
00:20:47
Yeah, I think we built a proprietary system.
00:20:49
I built it when I was a black stones called eye level that
00:20:52
most of the industry is and you can load into it real time
00:20:54
information. Information companies.
00:20:56
So, you know where their treasury cash is by Bank by
00:21:00
amount by interest rate and we haven't full treasury practice.
00:21:03
In fact, we have our own money market fund Etc that we offer.
00:21:06
And so one of the things we do, we underwrite a company is we
00:21:09
make sure they do treasury right, that they diversify their
00:21:12
deposit base that they have the right asset liability match and
00:21:16
that they, you know, move away. So, it wasn't really an issue
00:21:18
for us. There was some exposure, but we
00:21:20
move quickly. Here's when I saw an error on
00:21:22
say, starting last Tuesday, was the first time I Started seeing
00:21:25
PCS calling our companies say it is March 7th, right?
00:21:29
At March south or six months out.
00:21:32
I started seeing BCS calling the company.
00:21:34
Saying, hey, we're your deposits.
00:21:36
What do you have with SV B? And it was interesting.
00:21:39
Are there see to be like two teams?
00:21:42
One was keeping deposits? Everything's fine.
00:21:45
And some of those firms were telling their portfolio
00:21:47
companies that through Thursday and some of them were like move
00:21:50
quickly. Get out and see if here we feel.
00:21:53
It seems very clear and so at least, Some of Founders fund was
00:21:56
on move out. I mean, do you have a sense of
00:22:00
I'm trying to think who I mean us V.
00:22:02
I think even before last week, I had warned their portfolio.
00:22:05
Companies Fred Wilson. Yeah, I mentioned Green Oaks.
00:22:08
I'm trying to think if I've left any one notable out that's been
00:22:11
public about this. Well, the I can tell you the
00:22:14
buyout firms which are not their parting would not be doing
00:22:17
business with SVG, but the buyout firms began last week
00:22:20
taking assets away from Regional banks are there The streets were
00:22:25
doing because the buyout usually use Regional Banks because it's
00:22:28
a cheaper source of funding, so they'll use PNC or something
00:22:31
like that. So they started pulling out and
00:22:33
moving to the money center Max. There's kind of there's three
00:22:36
tiers of bags, their Community Banks, then you've got the
00:22:39
middle to your bench, which would be considered like a
00:22:41
Silicon Valley Bank earlier huge.
00:22:43
Then you have the top five banks that are but if you call
00:22:46
systemically important Banks, or since they have a different set
00:22:49
of rules and expenses around, that's Banks above 250 billion
00:22:53
and then five hundred billion other break.
00:22:55
St. Cyr Morgan Bank of America City.
00:22:58
Well Wells Fargo. Yeah, interestingly so think
00:23:02
about this 60% of all deposits in u.s. banks are above two
00:23:06
hundred fifty thousand dollars because the FDIC was set up in
00:23:09
1933. As part of glass-steagall, it is
00:23:12
clearly an anachronism. And I think when people realized
00:23:16
wait a minute, I could be an uninsured depositor and clearly
00:23:19
all the most Venture companies have a lot more than 250 in
00:23:22
Silicon Valley Bank that created like a Tinderbox.
00:23:25
Box that I think people move to protect really quickly and the
00:23:28
Run happened really quickly. They had 100 send word word
00:23:31
spread so quickly, right. I think Andreessen Horowitz
00:23:34
Founders were messaging each other, you know, saying, hey,
00:23:37
like if you see one big company, you know, pull their money from
00:23:41
SV B. Then it just becomes it becomes
00:23:45
a game theory problem. I'm and I talked about this in
00:23:47
my newsletter before, everything blew up.
00:23:50
It's just like Even if you don't really want to support the run
00:23:53
on the bank, it's just like as an individual player, it makes
00:23:57
sense to defect, you know it feels logical to be safe.
00:24:01
Like why do you want to take some big stance and risk your
00:24:04
money here, right? I mean, yeah, it seems like a
00:24:06
simple Game Theory problem to me.
00:24:08
You're actually right there, it's a painful decision.
00:24:10
When you've got a relationship with a bank like Silicon Valley
00:24:12
back, but in the end we're all 50 shares.
00:24:15
And as fiduciaries yeah, protect your investors.
00:24:18
Investors have to come first and if you believe there's a risk
00:24:21
surface, You can't analyze or you're fearful of you have to
00:24:24
move. I think that's when you saw like
00:24:26
the cascading. I mean, they had a hundred
00:24:28
seventy five billion in deposits and the end of last year's, the
00:24:31
last reported amount if it is in fact true, the Press reports
00:24:35
that they had 42 billion pulled on Thursday, there had to be
00:24:38
another 20, 30 billion before that and so you're looking at
00:24:41
half their deposit base was probably out and then the other
00:24:44
thing is with receivership so technically the bag spb went
00:24:49
into receivership at 844 Friday morning.
00:24:52
They stopped processing wires after 3 o'clock on Thursday, but
00:24:55
there's a difference, had there, not been the intervention of the
00:24:58
government. There's a difference between
00:25:00
someone who submitted a wire on Thursday and someone who didn't
00:25:04
until after see Burton. I think people do that Silicon
00:25:07
Valley Bank in my view, sort of bungled the communication with
00:25:13
investors, right? I mean, if we talk about the
00:25:15
government not communicating much, I mean Silicon Valley Bank
00:25:18
basically raised the money's Money.
00:25:22
And now to deal with General Atlantic that was contingent on
00:25:25
other fundraising, right? As what is Silver Gate was
00:25:29
failing, right? So it was you know it was like a
00:25:32
dark time for banks and then they announced this at the worst
00:25:35
time. It's not all buttoned up and
00:25:38
then they get all the VCS on the phone and they I mean from what
00:25:43
we've seen in like the information report is basically
00:25:46
they say we're fine unless all of you guys panic and it's like
00:25:51
if you're You see it's like what we are all panicking right now.
00:25:54
So while that somewhat reassuring if you're saying well
00:25:58
we're not fine if everyone behaves irrational and you look
00:26:01
around and everybody's behaving irrationally you're sending
00:26:04
yourself in the sprawl of your own demise.
00:26:06
So why would you say about how SV be managed and handled the
00:26:10
crisis. So our did I really hesitate?
00:26:13
I think the whole Community should be careful with what they
00:26:15
assume and what they want they do you already have Liz war and
00:26:18
saying all and put them all in a steak like that file just right.
00:26:22
It was a Confluence of events that was very hard to manage.
00:26:25
And you have the downgrade, or at least the signal downgrade
00:26:28
from BB. To BB - you had the sale of
00:26:30
Securities which obviously meant they were under enormous
00:26:33
withdrawal. Pressure at that point, then you
00:26:35
have the financing Jamie General Wax & amazing firm that do great
00:26:38
work. They were willing to step in.
00:26:40
They were right to make their funding contingent on filling
00:26:43
out the full two point, two five billion and then you know quite
00:26:46
Becker got em that 10-minute call that you just referenced
00:26:49
all our interactions with Greg. He's been in his decent.
00:26:52
I was just complimenting on what a business.
00:26:53
He built six months ago when we met.
00:26:55
I think it with all the best of intentions and they left that
00:26:58
dangling. Participle out there.
00:26:59
Well, unless, and I think when these things happen a bank run
00:27:03
his background, it's not, it's not rational, it's not doesn't
00:27:06
make sense. The math, doesn't matter.
00:27:08
You can point to all you want. I have a couple conversations
00:27:11
with some Regional back heads over the weekend person.
00:27:13
Like you can't say enough for doing off.
00:27:15
You got to get out there and got to keep hammering it home
00:27:17
because it was just so much misinformation.
00:27:20
And we all communicate so quickly people are Texting each
00:27:22
other you out you out. Boom gone and so that's the
00:27:25
minister live in this world of like control anymore, right?
00:27:29
You can imagine this cycle plane out a decade or two decades ago.
00:27:33
The Venture firms would have been able to sort of meet with
00:27:36
each other and say, hey we're gonna like show support the
00:27:40
media would have been much more reluctant to like talk about
00:27:44
runs like I tried to not fuel the run and say like okay this
00:27:47
is already a thing. So I'm going to talk about it
00:27:49
but because you know just a few weeks ago I think there was a
00:27:52
similar case with one of Mercury's Bank where there was
00:27:55
some fear uncertainty and doubt and then, you know, it was fine,
00:27:58
but because there's no media control is my point.
00:28:01
It's much easier for these rumors to start all over
00:28:03
Twitter. So you have the lack of ECU
00:28:05
control, lack of media control, and so rumors, and, and message
00:28:10
boards. And sort of direct communication
00:28:12
is so powerful, for short, a little bit, less controlled, and
00:28:15
that, and that if you watch would happen in crypto, that
00:28:18
was, it was one run after another one after another run.
00:28:21
I mean, who Never thought you'd ever run an exchange.
00:28:23
Like FTX exchange should have segregated accounts, but it
00:28:26
happened because they didn't have the account.
00:28:28
So I agree with you. This is to be analyzed, like the
00:28:31
speed with which this happened. And this is the conversation.
00:28:33
I had with both politicians and some of the banking sector Julie
00:28:36
week on the speed with, which this has happened the depth of
00:28:39
the misinformation. And even the seniority of the
00:28:42
people trapped. I mean, had one very senior
00:28:45
magic apples and one very senior CEO of a public company,
00:28:49
literally text me the exact same.
00:28:52
Misinformation about one of the bags over the weekend and to a
00:28:56
point where like the fdic's at this Branch.
00:28:58
So clearly with Maggie circles and Bible dead Rock.
00:29:02
And so I agree with you. That's why I made the comment
00:29:04
about and I was talking about this with representative Connie
00:29:07
yesterday, there needs to be a facility.
00:29:09
I think about if the stock it's a run and it's too volatile,
00:29:12
they stopped it, right? They have these Breakers, there
00:29:15
shouldn't be a breaker. If there's a run in one of these
00:29:18
bags in that breaker would be the ability for the bank to
00:29:20
immediately. Tap the Said to be able to pay
00:29:23
these deposits. You know what make it a t-bill,
00:29:27
get paid back into positives and charge the bank, whatever the
00:29:29
going rate for a 2-year bond is, right?
00:29:32
Just keep that out too, because this is going to keep happening.
00:29:34
If this just misinformation gets out there, it seems incredible.
00:29:38
Was there a skill in getting the money out?
00:29:40
It felt like, you know, smaller individual companies struggled,
00:29:43
there is definitely a sort of a game trying to figure out how to
00:29:46
get the money out. There is, we did have a couple
00:29:49
of our small companies smaller Investments had some Closure
00:29:52
and, you know, we would treasury death.
00:29:54
So we just immediately moved as fast as we could.
00:29:56
This is earlier than week. We felt like we really around
00:29:59
the Moody's down raise, when we started really pay attention to
00:30:01
it, there is some art to it because if you got people that
00:30:04
know how to get to the bank had to get to the people at the
00:30:07
bank, get out quickly. Unfortunately, that is how it
00:30:09
works. The site didn't go down until I
00:30:12
think they stopped about. As I said about three o'clock on
00:30:14
Thursday that became a big issue, some people didn't move
00:30:17
until after that thankfully the government stepped in, I wrote
00:30:20
about people from Friday morning, you know, going to the
00:30:23
New York office of Silicon Valley Bank and like trying to
00:30:26
get into the point. You know, very friendly.
00:30:29
Police officers were brought in to tell people that, you know,
00:30:31
they couldn't go into the office.
00:30:33
So a pretty dramatic. Yeah.
00:30:35
Seeing just a pause on Silicon Valley Bank.
00:30:37
I get this sense that, the bank thought like it's relationships
00:30:41
with the VCS would protect it from like defectors of his, the
00:30:45
word I'm using, you know, and there clearly were some VCS that
00:30:48
were trying to put their relationship with the bank.
00:30:52
First, what's your view on that? It's such a hard question Eric
00:30:55
because, you know, even with the best of intentions you do have
00:30:59
that tension between your fiduciary duty to your investors
00:31:02
and your loyalty to the bank. And I think that by Thursday, it
00:31:06
was pretty clear that things were getting out of hand and I'm
00:31:09
sure if left to its own devices. I mean, I'm sure that silicon
00:31:11
dog magwood then I've been they could have for their investors
00:31:14
that gets into the question. Erica, did the government way
00:31:16
too long? So then on Friday and there's
00:31:21
where we start to talk about the government, California declares
00:31:26
that Silicon Valley, Bank had failed and brings in the FDIC,
00:31:30
right? And then we basically have
00:31:36
That's Friday, right? Or is that Saturday starts
00:31:38
pissed, Rascal sauces, use this term here, it starts to 60 hour
00:31:42
clock over 60. Our clock is from the filing and
00:31:45
844 PST Friday to the announcement from treasury
00:31:50
yesterday, right now. So then we have this Collective
00:31:55
Panic on Twitter. Basically, the issue is that,
00:31:59
you know, obviously everyone is protected up to 250 dollars.
00:32:04
But after that, they're basically I like debt holders
00:32:07
and so they get paid out from the bank's actual assets as the
00:32:10
government liquidates that my sense is the vast vast majority
00:32:14
of banks that have failed have seen depositors get fully
00:32:19
covered right. But despite that there seemed to
00:32:22
be a ton of concern with in Silicon Valley about depositors
00:32:27
not getting covered. Why do you think this was
00:32:29
exceptional? So a couple things you write
00:32:32
when he took one thing, you said that you absolutely on the last
00:32:36
My can remember depositor losing money in a bank.
00:32:39
Failure was probably the Savings and Loan crisis in all of the
00:32:42
great financial crisis, not a single deposit or lost a single
00:32:45
Dollar in. But the frankly in action of
00:32:50
government and their lack of saying me, so Silicon Valley
00:32:52
Bank had almost a nine hundred and fifty eight billion dollar
00:32:55
deficit. By the time they filed an on
00:32:58
Friday morning and obviously once you have that deficit, the
00:33:00
match between redemptions of deposits and your ability to
00:33:04
liquidate assets to meet them, And then at that moment, the
00:33:08
government was not signaling that it would step in.
00:33:10
You know, we've heard a lot for the last few years about too big
00:33:13
to fail and we don't want any more bailouts and there's an
00:33:16
underlying social thing. Here are, there's a real
00:33:18
antipathy, from the government, towards Silicon Valley, towards
00:33:22
technology companies towards Venture capitalists and I think
00:33:25
that there was a fear that the government just wouldn't step
00:33:28
in. And I think we could talk about
00:33:30
the events over the weekend. I think what you saw yesterday
00:33:33
afternoon was brought to very begrudgingly and Like to Italy
00:33:36
and may be too late to contain some of the damage.
00:33:39
Because if you really think about it, so we could all you
00:33:41
back wasn't. It was just how to liquidity
00:33:43
crunch. If they had extended the what
00:33:45
they call defend window error, which allows a bank like Silicon
00:33:49
Valley Bank to pledge assets. So they could have taken those
00:33:52
long-dated. Treasuries under the new plan.
00:33:54
That just announced yesterday, they could have taken those long
00:33:57
dated Securities, put them back to the FED par, which in itself
00:34:03
is a bailout, could have put them back at par gotten look.
00:34:06
Witty and made the redemptions. But for some reason, the
00:34:08
government decided, well, we're gonna let that one go, and we'll
00:34:11
see what the contagion isn't that?
00:34:13
I think what we remember is the biggest mistake, because over
00:34:16
the next 60 hours, you have a real Roshan of faith in deposit.
00:34:19
You think they shouldn't have let s UB fail in the first
00:34:22
place. They should have taken those
00:34:24
assets. I don't know that they shouldn't
00:34:27
have put them in receivership, because I think that those rules
00:34:29
are hard to break, but what they should have done is when
00:34:32
immediately said, will honor, all the positives because the
00:34:34
assets were, there are not like Thankfully, the Savings and Loan
00:34:37
room. The underlying assets fella
00:34:38
Parks was real estate and stuff. The assets were there including
00:34:41
those elongated Securities. They should have said okay we
00:34:44
have the assets will pledge more of them to the event window and
00:34:48
then help them to the liquidity crisis.
00:34:50
And no depositors will lose money.
00:34:51
If they said what they said yesterday in conjunction with
00:34:55
the receivership on Thursday, the world will be a very
00:34:58
different place in the loss of jobs and the damage to the
00:35:01
economy, much more limited. But that sounds they did as of
00:35:04
yesterday morning and I spent a lot of Time on the phone over
00:35:06
the weekend with both Senators. Congresspeople was obviously
00:35:10
I've seen this before the government was not going to make
00:35:13
the decision of that announcement as a Sunday
00:35:16
morning. When we secretary yelling, went
00:35:18
on Face the Nation. If you listen to her words, she
00:35:21
had no interest in bailout was not going to come to any help
00:35:24
and was saying systems. Fine.
00:35:26
She was wrong. And by later in the afternoon, I
00:35:29
think she H elated and I think they realized they had to do
00:35:32
something or the contagion would be much bigger.
00:35:34
And that still can't stem? The Damage Done over the prior
00:35:38
60 hours, just as a personal anecdote after SUV failed, you
00:35:43
know, my small newcomer Mercury account.
00:35:46
You know, I moved money out of that into a Chase account just
00:35:49
to be safe. So just as a purely anecdotal
00:35:52
experience, you can sort of feel it.
00:35:53
Like over the weekend people are like, why not being a big Bank?
00:35:57
You know, it just like the incremental value of a small
00:36:00
Bank even if you know you're going to get your money back,
00:36:03
it's just like I don't want you know that.
00:36:05
So I'm not having a Access to my money when I need it.
00:36:08
I guess the big question here in terms of the government's action
00:36:12
is like how much was this? An SV be specific problem, right
00:36:17
SV be specific and they're sort of decisions in terms of
00:36:21
Investments as we be specific in terms of their exposure to
00:36:25
startups and then SV be specific and that they had customers that
00:36:29
seemed like loudly, you know, telling everybody to bail and
00:36:32
like if other Regional Banks didn't have that same sort of I
00:36:36
don't know, network of communication.
00:36:39
Would that have happened? I think there's evidence against
00:36:41
that. So, what's your view in terms of
00:36:43
how SV be specific this was? I think SUV was unique but not
00:36:47
idiosyncratic. It was unique in the industry.
00:36:50
It served with probably unique that the ecosystem is relatively
00:36:54
concentrated was certainly unique that their loan book
00:36:57
include Adventure mean really when they compete for Venture.
00:36:59
There's not really any other banks that underwrote ventured
00:37:02
out like that. Eric, what they would compete
00:37:04
with on term sheets would be alternative.
00:37:06
Asset managers that do that like, like, right funds.
00:37:10
So they were unique, there are thing that has this was the 16th
00:37:13
largest bank. I think people forgot that, you
00:37:16
know, a few years ago, it wasn't top 100 and now it's 60.
00:37:20
And so it's size. And scale was bigger that I
00:37:23
think and the government just they didn't move fast enough to
00:37:26
at least two swage the concerns and folks did exactly what you
00:37:29
did error. They're like, well, why wouldn't
00:37:30
he go to Money Center? Banks, the issue now is we're
00:37:33
going to drive more concentration risk with the top
00:37:35
Banks, which Create more too big to fail.
00:37:38
It's exactly the opposite of a policy of helping the system.
00:37:40
Now, in the end, the government did the right thing.
00:37:43
I think everyone is safe. Now across all the bank's.
00:37:46
That's great, but you have to go back and look at what damage was
00:37:49
caused in and what assets moved around in the meantime, the
00:37:51
government on Sunday announced that it would cover depositors
00:37:57
across the banks and that they would take some of these
00:37:59
long-held assets, right? We talked about that.
00:38:02
They also at the same time, they announced one additional bank
00:38:05
failures Right. So signature Eric is a pretty
00:38:08
now that is an idiosyncratic back, we had sure has a crossbow
00:38:11
bank, right? They do take some crypto
00:38:14
signatures long but in the eyes of The Regulators, they
00:38:16
struggled in 2008 because they had a lot of real estate that
00:38:19
they were very concentrated in commercial real estate and the
00:38:22
tri-state area. They were taking some crypto.
00:38:25
There was a back and forth so that was no surprise to anyone
00:38:29
Silicon Valley Bank is a surprise for sure.
00:38:32
Like, do you think First Republic, if the government had
00:38:35
taken? No action.
00:38:36
Do you think First Republic? What did well they're, they're
00:38:39
unique, they're one of these collateral damage just by rumor
00:38:42
and other things me, right? Is their stock price was down.
00:38:45
There's somewhat smart questions down.
00:38:46
I thought, honestly, I saw some pretty irresponsible
00:38:49
Communications to some of our companies by other investors
00:38:53
saying oh it's first of all. It's next.
00:38:55
We just totally irresponsible like right actually
00:38:57
misinformation such as they had FDIC at their brains just first
00:39:01
of all because Billion dollars of liquidity.
00:39:04
It's always been a really well-managed back there, fine.
00:39:06
They were always fine. It's just a perception thing.
00:39:08
You can't hurt and, of course, that impacted their stock price,
00:39:12
but it's always been a very steady bank.
00:39:13
It's an a-minus rated back the same goal.
00:39:16
Do you think without government action is so would have been
00:39:18
fine? Are you?
00:39:18
I do? I think they would absolutely
00:39:20
would have got then, what is the contagion?
00:39:22
If signature was a sort of unique already?
00:39:24
Troubled bank. If the one that was sort of
00:39:27
perceived as next in line was probably going to be okay.
00:39:31
Then why not just let Silicon Valley Bank customers?
00:39:34
Get paid out the old-fashioned way off the assets of SBB.
00:39:38
First off, the thing they opened yesterday which they call it
00:39:41
Bank treasury funding program. Our is the same thing that
00:39:44
existed in 2008. As I was saying the FED opens up
00:39:47
its Windows, you could pledge assets.
00:39:49
Not that back then, it was mark-to-market now.
00:39:50
It's par which is effectively a bailout effectively.
00:39:53
This is really interesting. The FED is admitting that they
00:39:56
raise rates too fast and they created six hundred billion of
00:39:59
unrealized losses in these Banks.
00:40:00
Well, they're saying Say I'll give it back to me at par even
00:40:03
though it's not worth far. So right, Silicon Valley Bank
00:40:06
had that facility available last week they would have pledged to
00:40:11
21 billion. They would have gotten 21
00:40:13
billion, not 21 billion, minus 1.8 billion in losses, and would
00:40:16
be in a different position. So I think the problem the
00:40:18
government is they were too reactive, not proactive and now
00:40:21
they're put in place things that could be helpful, but I'll go to
00:40:24
the psychology point. You actually said it perfectly
00:40:27
in your own words. Why not why not move from a
00:40:30
Regional Bank to one of these? Your systemic Banks and I think
00:40:33
that's the longer term thing that the government's going to
00:40:36
have to Grapple with. Because, you know, I think these
00:40:39
programs are going to be permanent in terms of like
00:40:41
culpability Silicon Valley Bank, lobbied successfully, the Trump
00:40:47
Administration to lower the sort of the standards for a Regional
00:40:52
Bank, like Silicon Valley Bank great.
00:40:54
I mean, in terms of the regulatory regime to protect
00:40:59
consumer confidence in the bank, SUV management intentionally
00:41:04
undermine. I mean do you just?
00:41:05
Yeah I'm not I don't disagree that a little better.
00:41:07
Eric, I don't know specifically in conversations with a Lobby
00:41:10
for I would just say the 2018 act I think the argument from
00:41:15
the regional Banks like a Silicon Valley Bank was that the
00:41:18
owners regulations and requirements and capital
00:41:21
requirements that were put in place in 2008 we're limiting
00:41:25
their ability to serve smaller businesses and I think that's
00:41:29
really what was coming from you're saying look okay Have the
00:41:32
same thing at JPMorgan and if it's a little bit looser than
00:41:36
I'll be able to serve the growth of the community, I think it was
00:41:38
more a genuine interest in that and that's that's what was the
00:41:41
intent, obviously that meant that maybe the boundaries of
00:41:44
that were pushed and they turned out to create a risk services
00:41:47
that now come true. I mean, thank you for answering
00:41:52
to some of the arguments, the whole valley is going to face,
00:41:54
but I mean Larry Summers, you know, tweeted out something that
00:41:58
was like now is not the time to worry about moral hazard, you
00:42:01
know, over the weekend when the government was debating this
00:42:04
decision. And if anything that gave me
00:42:07
such like a negative reaction because it's always, you know,
00:42:09
when something's inconvenient and uncomfortable that people
00:42:13
want to abandon holding actors accountable for moral hazard,
00:42:18
obviously, so, Look on Valley Bank management would prefer to
00:42:21
have, like an existing bank that they can continue to get paid by
00:42:24
and like, that's their careers. But, you know, we are in some
00:42:28
ways incentivizing people to take more risk, run an
00:42:31
aggressive strategy, get paid well.
00:42:33
And then, you know, if the government picks up the pieces,
00:42:37
when everything falls apart, I mean it's such a conundrum,
00:42:39
right? He's, you can make marks on both
00:42:41
sides. They should have assumed
00:42:42
interesting. Now, Summers was saying last
00:42:45
week s, VB was just isolated incident will not sit.
00:42:49
Still Exactly. So you how do you square those?
00:42:51
And then he then he turned his mind.
00:42:53
She didn't realize yeah, you played a critical role in this.
00:42:55
There's a young Congressman that covers the district where
00:42:58
silicon die Bank was named real Kana.
00:43:00
I see ultimately. He was exactly what you'd want
00:43:04
for representative. He was super well-informed.
00:43:06
He went on Face the Nation the same time yelling did.
00:43:09
He was much more articulate and convincing that the contagion
00:43:12
will cost jobs and hurt the larger economy and we shouldn't
00:43:15
thumb her nose. Is it bailing out?
00:43:16
Bankers, forget about the executives.
00:43:18
It's all about the climb. - really and he was very
00:43:21
articulate and he was tenacious over the weekend and I think he
00:43:23
had a big role to play and how they tied the term.
00:43:26
Because as of yesterday morning they weren't going to do
00:43:29
anything and today would have been a cataclysm.
00:43:30
I'm glad they did something. I still think they moved too
00:43:33
late and I think they need permanent rules that just help
00:43:36
banks with liquidity. Crunches, you should never
00:43:38
bailed it out a bad behavior of. They make bad loans and stuff
00:43:41
like that, but if it's just simply a mismatch because
00:43:44
they've got a conservative balance sheet and they need to
00:43:46
be depositors and there's a run. They should.
00:43:49
A way to do that with a public facility, that allows this, and
00:43:52
that will be something, I think that they need to look out and
00:43:55
going back. And we're all day trying to
00:43:57
lobby for that. And to the extent that people
00:43:59
are fighting on Twitter about, whether it's a bailout, like, I
00:44:01
feel like that, who cares? You know, it's like depositors
00:44:03
got bailed out not shareholders, not the executive would sort of
00:44:07
all understand like what happened there.
00:44:10
So I feel like I'm not getting into the equity, in the
00:44:13
bondholders, stuff like that, right?
00:44:15
So, that is so paid 40 billion a year ago.
00:44:19
Now Zero. Does the government really have
00:44:21
to move so fast? I mean, was Friday to Sunday.
00:44:23
I am sympathetic to Biden and, you know, the fed and all that
00:44:27
in that, you know, you need a couple space to think about
00:44:30
these things, right? Is is the standard they needed
00:44:32
to have a solution like Friday? Yeah.
00:44:36
No. I was thinking more like the
00:44:37
Surfers. All the rules work because once
00:44:39
they were going to fall, they were in a receivership in the
00:44:42
blink of an eye. So that process worked although
00:44:44
as I point out for the fdic's an anachronism, it's just not
00:44:47
effective for a world where the capitals at the It is now and I
00:44:50
do sympathize with the administration trying to figure
00:44:53
out what to do. I just think there should have
00:44:54
been something place, so they could access the liquidity
00:44:57
rather than having to sell that kind of Securities in this
00:45:01
environment at a loss. That's all I'm saying.
00:45:03
I don't agree with what bailouts.
00:45:05
I don't believe in the bailout but just giving them the
00:45:07
quiddity would have avoided. A lot of us.
00:45:08
Yeah. The other solution would have,
00:45:10
just been a buyer, right? Or like maybe a buyer comes but
00:45:14
like right now, it seems like they're trying to sell it piece
00:45:17
by piece, right? Or why Won't Anyone One by we
00:45:20
saw. What was it?
00:45:21
The UK version of it, Silicon Valley Bank did get acquired
00:45:25
right by it. Did I believe, I believe it's to
00:45:27
be acquired by HSBC. You know her as soon as this
00:45:30
started happening part of our risk analysis, we were looking
00:45:33
at it really over the last month or so was that you couldn't see
00:45:37
a buyer for this one because I'll get back to that 75 billion
00:45:41
dollar loan book. I just don't think it's
00:45:42
something that you can analyze like what does a 20 million
00:45:47
dollar loan to a money-losing technology?
00:45:49
A that's not paying current interest but that pays
00:45:52
interesting kind, what does that mean?
00:45:54
I think in this kind of free fall on Tech valuation.
00:45:57
I don't think anybody knows. So I'm actually not surprised
00:46:00
that they weren't able to do it. And it might have been and he
00:46:02
and Eric we may find out that the final straw was that with
00:46:06
the bids were due at 2 p.m. EST yesterday that they were
00:46:10
underwhelming or not at all and it was only what, three hours
00:46:13
later that the FED came out their joint announcement.
00:46:16
I want to move on to the broader effect but do you think without
00:46:19
like, The run without the dynamic of everybody texting
00:46:22
each other like, in a short period of time that this was in
00:46:24
trouble. Do you think Silicon Valley Bank
00:46:27
still fails at some point? I mean, they had, I mean, that's
00:46:31
so hard. I don't really have the sense
00:46:33
for that kind of thing. It's like, okay, they have these
00:46:35
challenge Holdings, their startup investment.
00:46:38
Somebody else would make like, does this play out the same way,
00:46:40
just slower if there is inserted the fear so hard to tell her,
00:46:45
it's so hard to tell, I think they are very unique in the fact
00:46:48
that they were so Spurs to a single ecosystem that will be
00:46:51
the thing that will come out. Now, is there a role for a
00:46:55
viable bank that lends to the Venture community and all these
00:46:58
great entrepreneurs and ideas? Sure.
00:47:00
Is that the right format the way, they did Venture debt stuff
00:47:03
like that. I just don't know.
00:47:04
I don't know. I don't think we're going to see
00:47:06
another Silicon Valley Bank though.
00:47:08
I don't think anybody's going to try to recreate that great
00:47:11
framing for the next set of questions.
00:47:12
So we survived the depositor risk but like what tools will
00:47:16
start ups. Not have VC's not have now that
00:47:18
SV B is Gone, right? I mean, it was a key part of the
00:47:21
ecosystem without it, especially if you're saying nobody's going
00:47:25
to step in to do some of the same things.
00:47:27
What are the things that are going away here?
00:47:30
This is the hardest part here because there's no question by
00:47:34
some reports. They were covering fifty percent
00:47:36
of startups or what's called Venture Capital Stage companies,
00:47:39
or maybe even growth stage. So there's no question, it will
00:47:41
leave a giant void. There are some uses of the
00:47:45
Venture debt that work. So, some companies have, you
00:47:48
know, season Revenues or seasonal expenses or they have
00:47:52
something on their balance sheet, that they need to fund
00:47:55
that they need for operation. That's an appropriate use of
00:47:58
venture debt, and it shouldn't be funded by Equity.
00:48:00
It should be funded by Venture debt the lines blur, when you
00:48:04
get to a replacement for equity and it's just a, you know, an
00:48:08
accruing note that has all these covenants, that's less
00:48:11
productive, we try to avoid that in all of our companies, but
00:48:13
there was a productive side of this that was priced correctly.
00:48:17
Like, you know, collateralized Lending.
00:48:19
Against, you know, whatever is needed to maintain operations.
00:48:23
For example, that's going to be missing and that means cost of
00:48:26
capital for Silicon Valley is going to go up because they were
00:48:29
a cheaper than Equity cost of capital and that whole is gone.
00:48:34
And he's 75 billion is a lot of money in veteran.
00:48:37
Deta if in fact, that's what the whole book was and that will
00:48:41
leave a real void and I think I don't see that book getting re
00:48:44
underwritten. Now in a receivership Eric you
00:48:47
can hold on those loans until As long as you played by the
00:48:50
company, play out over time. Although I'll bet a lot of
00:48:52
people breach their covenants last week when they took Capital
00:48:55
out of Silicon Valley back. Exactly.
00:48:57
So you know the part of the loan covenants that you're
00:49:00
referencing was that people had to keep their money in spb, if
00:49:03
they pulled it they would be breaking it.
00:49:05
So then there's this real decision.
00:49:06
Like do I break the Covenant, take the money or do I hold the
00:49:09
Covenant, do you have a sense now?
00:49:11
I mean, I guess it would seem given depositors or cover that
00:49:15
the people who stuck to the Covenant are in a better place.
00:49:18
Or is it clear? Which decision was smarter like
00:49:21
a great, such a great question her because I actually had two
00:49:23
entrepreneurs call me on this exact issue.
00:49:26
My advice was to call the bank, which both of them did and the
00:49:29
bank actually said, will waive it.
00:49:31
Oh, great. Yeah, they were this is but this
00:49:34
is like Tuesday, Wednesday, they weighed if they didn't waive it
00:49:37
and you move the cash. Now you're receivership, they
00:49:41
may have a technical argument that you breached it, but my
00:49:45
thinking is I just don't see any receiver saying, we'll wait a
00:49:47
minute. You breach, the Covenant by
00:49:49
Acting yourself. Therefore I'm going to your oil.
00:49:51
Not I know it's hard to say the last time we had something
00:49:54
similar to, this would be One Bank of New England went out of
00:49:56
business in 1991 and then they put all the loans is something
00:50:00
called recall management and then they work their way through
00:50:03
over a Year's situation by situation.
00:50:05
And you know, obviously you know they don't but they would be go,
00:50:08
she ate longer holds and things like that so they could get more
00:50:12
recovery because they're answer. Now on those loans is to get
00:50:15
maximum recovery, so they're not going to go in and call it and
00:50:18
put companies in distress. They're going to work with the
00:50:20
companies. At least they did in the case of
00:50:21
banking, one recall management. They did work through with the
00:50:25
company's way to get the most maximum recovery.
00:50:28
Which might mean giving extension things like that.
00:50:31
Do you think there's going to be a banking Story?
00:50:33
I mean, obviously Silicon Valley is obviously going to be
00:50:35
affected but like do you think we've stemmed in this is a hard
00:50:38
thing to predict, but do you think we have stemmed the bank,
00:50:40
the financial piece of this or do you think there's a lot more
00:50:43
to drop still in terms of the regional Banks?
00:50:47
It's hard to tell with those. I mean that was like, He had a
00:50:49
bazooka with the government did so there shouldn't be any more
00:50:51
failures. I think there's a lot of
00:50:53
speculation and better. Probably a lot of assets moving
00:50:55
around and now have an impact on value, but there shouldn't be
00:50:58
any more speculation on. They have the ability to save it
00:51:02
and I don't think the government's gonna let any more
00:51:03
Banks. Go, I just don't think that's
00:51:05
going to happen. And so it should stabilize.
00:51:08
I think if you asked about the headlines, for this whole thing,
00:51:10
Eric, it's going to be like, who's going to fill the void for
00:51:13
Silicon Valley? Will it increase the cost of
00:51:15
capital? You know, should bags?
00:51:17
Take Venture debt? What's the government's role in
00:51:20
providing liquidity? When there's a liquidity crunch,
00:51:23
I think those are the type of issues that we're going to be
00:51:25
hearing about over the next fall out of the next couple of years.
00:51:28
I mean, a couple months ago, in terms of the Silicon Valley
00:51:31
story, you know, I was pulling people of whether this was
00:51:34
anything like.com and most people said, no, you know, it's
00:51:38
very different, Bill girly replied that he thought it was,
00:51:42
but then he didn't elaborate, but my point is just that it
00:51:44
does feel like a bank, failure attached to Tech startups.
00:51:49
Makes it feel much more like, okay.
00:51:50
This is a seismic moment and I've been arguing for a long
00:51:54
time, just and I'm not the only one that, you know, companies
00:51:57
the raised hundreds of millions of dollars, fails slowly, right?
00:52:02
That like, it takes a long time to show that, you know, those
00:52:06
companies aren't working. Do you think this speeds that
00:52:09
up, how does this impact of the failure rate of growth stage
00:52:12
startups? I think it will push values
00:52:15
down. I think it will definitely have
00:52:17
an impact of values that we're Already Under Pressure, I think
00:52:20
it will result in some cases fewer startups.
00:52:23
Making it where they would have had an option like a venture
00:52:25
debt or something like that to bridge them.
00:52:27
So, I, unfortunately, I do think it will have a devastating
00:52:29
material impact on the ecosystem, valuation, the
00:52:32
success of the companies and we went into this post Bubble
00:52:35
World. There were 350 Tech unicorns, it
00:52:39
would take four years of a very healthy IPO Market to digest
00:52:42
that. And I think to what your point
00:52:43
is, a lot of them aren't going to turn out to be what they were
00:52:46
worth is just going to take longer to kill him because there
00:52:47
was so much Capital other What's your play going forward?
00:52:51
Or how do you react to this situation?
00:52:54
As somebody investing in startups and funds and all that
00:52:58
we've been preaching to our clients.
00:52:59
You know 2000. I could be some examples in
00:53:01
2021. We thought the fundraising
00:53:03
environment was credible. You know, we took one of our big
00:53:06
Holdings in their view the public at Lake 2020 2020 and
00:53:09
2021, we raised a ton of capital for businesses in 2022.
00:53:14
It was all about being more, conservative, extenuating
00:53:17
extending Runway. If necessary 17.
00:53:19
One of our assets are high cash flow business.
00:53:21
Anyway, we don't do a lot of venture, we do more, we call
00:53:23
more growth, Equity later stage, we had people in a conservative
00:53:26
operating posture for a while. And right now, the big question
00:53:29
that companies are asking us. We ate companies that are
00:53:31
pre-ipo, this will put those dates back for sure, where we
00:53:36
were saying we thought some of the strongest biggest names
00:53:38
could go out in the fall and that would be getting the IPO
00:53:41
Market. I think that's probably now
00:53:43
closer to the beginning of next year and it's going to take some
00:53:45
time. So this all have real
00:53:47
reverberations reverberations are going.
00:53:49
That market just take a longer in play through what we're
00:53:51
telling. Our investors is setting up to
00:53:53
be a great vintage if you have a lot of dry powder and capital
00:53:56
because the you know, the leverage if you will switch it,
00:53:59
even more firmly in the hands of the GPS who have Capital you're
00:54:02
not competing with Venture debt anymore and you know I think
00:54:06
that there's curricular saying good for valuations makes
00:54:08
ventral I wish to come down in the best companies would be a
00:54:11
ruse Capital but you know it's also me it's gonna be a really
00:54:14
good investment period for people that have scale stuff.
00:54:16
Everything is right now. Eric the biggest Thing that
00:54:19
we're seeing is one of the biggest a lot of distress GPS.
00:54:22
A lot of GPS didn't sell anything over the last couple of
00:54:24
years and didn't return our people to their investors.
00:54:27
And so we're seeing investors even in the companies that we're
00:54:30
in some of our best, capful businesses are just selling your
00:54:33
shares at a discount because there is a lot of distress in
00:54:36
the GPS system before. So it cannot back.
00:54:38
And now you have that on your buying a venture firm shares in
00:54:41
the company you believe in, or you're buying out an LPS
00:54:43
interest in those Venture for. Thanks for clarification, buying
00:54:46
out other Venture firms. That are on the cap tables of
00:54:50
our companies that might have gotten it earlier, or did
00:54:53
something else because they haven't returning Capital to
00:54:55
their investors. And, you know, that it was the
00:54:58
opposite of what we were doing last two years.
00:55:00
We returned you know billion dollars of capital in the last
00:55:02
18 months to our investors. And so I think it's important
00:55:05
that, you know, the u.s. is a lot of stress in the system
00:55:08
right now and that will make for opportunities.
00:55:10
And one of the opportunities is buying from other GPS.
00:55:12
The other opportunities, good companies, that need operating
00:55:15
intervention. There's companies that need
00:55:17
capital for Ian's and growth, and make up for the whole
00:55:22
old-school guy backs. There's gonna be a lot of.
00:55:23
What are they? Give me like a, um, or fund.
00:55:26
You're investing out of, like, with Wes cap.
00:55:28
I feel like you like to live a little under the radar, but
00:55:30
since I have you anyway, just educate people little bit on
00:55:34
whatever where are you doing? Is this like, how much is this,
00:55:38
your, your wealth versus LPS or yeah, just give me a sense.
00:55:42
It's not so it's fully third party.
00:55:44
The biggest investors in the fund are the partners themselves
00:55:47
but we're 28 billion offer. Do typically later stage after
00:55:51
VCS and we invest in the operating scaling of the
00:55:54
business and that's what we've always done.
00:55:56
That's been 25 years will start in three businesses that got to
00:55:58
unicorn status. And we, that's what we focus on.
00:56:01
WE focused we just do marketplaces, are because their
00:56:03
asset light and they scale, you know, we build our positions in
00:56:06
the companies as we gain confidence in the management
00:56:09
teams. And I have to say with
00:56:10
top-performing growth fund in the Cambridge and x and because
00:56:13
we have an operating strategy. So that's why we were talking
00:56:15
before, take like treasury. So we managed centrally Sorry
00:56:19
for all the companies, their caps, their positions, their
00:56:21
liabilities, we have our own money market fund.
00:56:23
And so we go in and operationally, improve the
00:56:25
company's and then steal them an answer.
00:56:27
That's our strategy. Do you think we're going to see
00:56:29
like, a lot of funds go away? Or I just I mean, it feels like
00:56:32
if you didn't return a lot of money in 2021, some of these
00:56:36
managers are going to be challenged and to fit into the
00:56:39
SV B question. I guess it's like what are on
00:56:42
limited partners heads right now?
00:56:43
Because I mean, they just face this potentially like
00:56:46
existential crisis for all Venture Investments.
00:56:49
Do you think that's gonna breed a lot, more conservatism and a
00:56:52
little bit more action from LPS, in terms of Shifting away from
00:56:56
the Venture industry, I was just at the institutional limited
00:57:00
partner, sociation on Oppa board meeting last week and we were
00:57:03
talking about these issues. I would say, most of them, I
00:57:05
have the LPS is who return Capital before things cracked
00:57:10
whose best position they think, frankly during the Go-Go days
00:57:13
last five years, that some managers behaved badly, raised
00:57:16
funds that were too big, put them in the ground.
00:57:19
How quickly did pay attention evaluation, and the last pieces,
00:57:22
are a lot of them were very skeptical evaluation there
00:57:25
looking at the disconnect between you, look at the NASDAQ,
00:57:28
you look at the private markets and they scratch their heads
00:57:30
going. Well, how is your fun?
00:57:31
Not down and that level. So there's a little bit of
00:57:34
Suspicion. I'd say the big takeaway is the,
00:57:36
LPS are now concentrating and the better performing bigger
00:57:40
managers and there's a lot of worry in the Venture space that
00:57:43
some of the funds have just got too big and they're doing too
00:57:45
many deals too fast or too little due diligence and so when
00:57:48
you see some of these kind of Tackler blow-ups.
00:57:50
You know, he's our tributing into a breakdown, the risk
00:57:53
system, because VCS are really set up to go find great
00:57:57
companies, develop ideas, find to go to market fit, maybe not
00:58:02
do two, three, four hundred million dollar checks and
00:58:04
companies at an early stage. And so, I think there's a view
00:58:07
that, that it'll calm doubt, but, you know, from every crisis
00:58:10
comes, good thing, we're actually launching our treasury
00:58:12
fund and our treasury platform as a third-party service.
00:58:15
Because I think this proves something that I think is, how
00:58:18
companies can Do a better job managing their balance sheets
00:58:20
and exposures I think there's a real business opportunity.
00:58:23
Hmm. You're like selling software or
00:58:25
what do you? Yeah.
00:58:26
So we built software that connects all the banks so that
00:58:29
you can move around your bank balances.
00:58:31
You can see where you're getting certain level of interest rate
00:58:34
versus not, you can look at, go even deeper.
00:58:37
Look at everybody. I could tell you how much we had
00:58:39
in each different sector. How many investment grade bonds?
00:58:41
We had how many Treasures you had Etc, and then we can manage
00:58:44
the interest rate exposure. So it's automating treasury
00:58:47
because most companies before they go public, Don't even have
00:58:49
a treasure. Hmm.
00:58:50
If it's a start-stop, something to focus on, you just put the
00:58:53
money in the bank and just don't think about it.
00:58:55
And where I mean, that was it funny dynamic, in terms of like,
00:58:58
if you want to say, oh, depositors shouldn't get bailed
00:59:01
out because they're, like, sort of supposed to be Savvy.
00:59:03
Customers, it's like so many of these startups.
00:59:05
Don't even have CFOs, you know, they're, they're not necessarily
00:59:08
the savviest Shoppers of like which banks to go to, you know,
00:59:13
and to some degree they deferred to their investors.
00:59:15
And it will be interesting to see how much blame like he is
00:59:19
get from startups. In terms of the decisions they
00:59:22
made it, I think it'll change. I think even at early stages,
00:59:25
people will start to realize that Treasury and cash
00:59:28
management is an incredibly important part of being a
00:59:29
successful company, whether or not you were treasure.
00:59:31
You don't need somebody who's like, making Market Beth, but
00:59:34
there's subtle ways that you can put money to work.
00:59:36
You can manage your cash cycle. Like you can create something
00:59:39
very powerful in almost any business, get treasury piece,
00:59:42
right? Yeah.
00:59:43
My last question, I mean, is this going to be a hard year for
00:59:46
the tech industry? I mean, how long does it?
00:59:49
Downturn last. It feels like this really killed
00:59:52
any hope. You know, I don't know, there
00:59:54
would be a rebound and we just move on, from this, at least in
00:59:57
my mind, January was great month of markets looked like it was
01:00:00
coming back. The bankers have been talking to
01:00:02
her seeing people dust off their previously filed S1.
01:00:06
We've got two of them that we did it with.
01:00:07
We're starting to get a sign and then this comes about and I'm
01:00:10
very positive person by nature. But I'll continue my analysis.
01:00:14
You know, you had the 2-year. Treasury was five, as I said,
01:00:17
507 two weeks ago. So today it's at 425 typically,
01:00:21
what happens when there's a rate rise, the second year of the
01:00:24
rate, Rises hits harder, and the typical impact on GDP is a
01:00:29
negative 2 and a half percent. So we are in the second year
01:00:33
now. And right now gdps clocking in
01:00:35
at about 1:00 or so, actually slightly lower about .95.
01:00:39
So you could see this turning more to a hard Landing, I hate
01:00:41
to say, I think it's going to be a tough year.
01:00:43
This will be the tougher than two years last year was about
01:00:46
valuations. This one will be about growth
01:00:48
and funding. We'll get sweet.
01:00:50
And if you're saying GDP is shrinking, then it's also
01:00:53
effects like consumer spending and sort of the revenue for
01:00:56
these company consumer defaults are creeping up.
01:00:59
Obviously, mortgage rate things, there are things that are
01:01:01
hitting, bassoon a hard to get high energy prices.
01:01:04
You've got a consumer, you know, mortgage rates are going to,
01:01:06
I've got quite a bit and so you've got a lot of pressure on
01:01:09
the consumer and starting to play itself through.
01:01:11
So I think watch one in the spring and summer travel season
01:01:14
comes around. I think you'll see down flat
01:01:16
from where it was last year, and that's the beginning.
01:01:19
Of the signs of discretionary spending coming in and so you
01:01:22
know the worst of tips come they raised rates so fast here, the
01:01:25
shock to the body after. So many years of such a dull
01:01:29
bosz, you know, stance and zero rates.
01:01:31
It's going to take some time. LT.
01:01:35
Thanks so much for coming on the show and explain it to everybody
01:01:37
really appreciate our key. Doing a great job in for me
01:01:39
people. So thanks for all your work.
01:01:41
Thank you, that's our episode. Thanks so much for listening to
01:01:45
my interview with Lawrence Tosi like comment, subscribe I'd go
01:01:49
to newcomer dotco and follow along on the sub stack.
01:01:52
Thanks so much to Tommy Heron or editor O'Reilly.
01:01:54
Can sell my chief of staff. Young Chomsky for the music.
01:01:58
I'm Eric newcomer. Thanks so much.
01:02:00
See you next Tuesday? Goodbye.
01:02:03
Goodbye.